Question
You have two identical portfolios of $100,000 one in a tax-deferred account, the other in a taxable account. Both portfolios are expected to earn 8%
You have two identical portfolios of $100,000 one in a tax-deferred account, the other in a taxable account. Both portfolios are expected to earn 8% per year. Assume that the applicable taxes are 20% each year in the taxable account. Both investments have annual 100% turnover (that is 100% of the stocks in the portfolios are sold and new ones are bought at the end of the year). a. What is the after-tax value of the two investments at the end of 10 years? b. Assume both portfolios are in a taxable account. Portfolio A has 0% annual turnover. Stocks in portfolio A are sold at the end of 10 years and the taxes are paid at the end of 10 years. Portfolio B has 100% annual turnover, with taxes paid each year. What is the after-tax value of the two investments at the end of 10 years?
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